Internal Cause Analysis
The price performance of altcoins in this round is not as good as expected. I think there are three main internal reasons:
1. Insufficient growth on the demand side
Lacking attractive new business models, product-market fit (PMF) is nowhere in sight for most tracks. Compared with the ICO boom in 2017 and the DeFi boom in 2021, this bull market lacks the same level of business innovation and narrative. Therefore, the strategy should be to overweight BTC and ETH, while controlling the allocation ratio of altcoins. This view is very correct so far. The lack of new business stories has led to a significant reduction in the inflow of entrepreneurs, industrial investment, users and funds. Investors will naturally invest in areas with new stories, such as AI.
Despite the lack of innovation, blockchain infrastructure is constantly improving. For example, block space fees have dropped significantly, cross-chain communication solutions have gradually been improved, user-friendly wallet experience has been upgraded, and Solana’s Actions and Blinks features have been launched, all of which have laid the foundation for future innovation.
2. Excessive growth on the supply side
The number of projects is over-issued, and high-market value tokens continue to be unlocked. As of now, the price of $BTC is down about 18.4% from its highs, while the total market cap of the altcoin is only down 25.5%. Despite the decline in altcoin prices, their total market capitalization has not declined significantly, reflecting the substantial growth in the number of new altcoins. A large number of new tokens were issued, including meme and infrastructure tokens. The high market capitalization and low circulation rate of these tokens led to selling pressure in the market.
3. The lifting of restrictions continues
The continuous unlocking of tokens of low-circulation and high-FDV projects has brought heavy selling pressure. A large number of tokens that have been listed are facing unblocking. The common characteristics of these tokens are low circulation ratio, high FDV, and early institutional round financing, and the token cost is very low. This dual pressure on the demand side and the supply side ultimately led to the overall downward shift in the valuation of these crypto projects.
Focus on Defi: Getting out of the bubble period
Since 2020, DeFi has become an important category in the altcoin cluster. In the first half of 2021, the most popular projects in the top 100 crypto market capitalization rankings were DeFi projects. However, with the over-issuance of homogeneous projects and a large number of hacker attacks, the popularity of Defi projects has gradually declined.
Entering this round of bull market cycle, the price performance of most DeFi projects that have survived to this day is not satisfactory. But it is precisely because of this that DeFi projects that have emerged from the bubble have begun to appear more attractive. Specifically:
Business
With mature business models and profit models, leading projects have moats. For example, in DEX, lending, stablecoins and derivatives projects, the market share of leading projects in each track tends to be stable, and the number of competitors has decreased, so they have certain service pricing power.
Supply side
Low emission, high circulation ratio, and small scale of tokens to be released. Most of the top DeFi projects have passed the peak period of token emission due to their early launch time, and the selling pressure in the future is extremely low. For example, the token circulation ratio of $AAVE is 91%, Lido is 89%, Uniswap is 75.3%, MakerDAO is 95%, and Convex is 81.9%.
Valuation
Market attention and business data diverge, and valuation levels are at a historical low. Compared with new concepts such as Meme, AI, Depin, Restaking, and Rollup services, DeFi has received less attention in this round of bull market, with mediocre price performance, but business data continues to grow. For example, while the lending protocol $AAVE hit a record high in quarterly revenue, its PS (circulating market value/annualized revenue) hit a record low.
Policy
The passage of the 21st Century Financial Innovation and Technology Act (FIT21) will facilitate compliance in the DeFi industry and may trigger potential mergers and acquisitions. The bill provides a clear federal regulatory framework for the digital asset market and promotes the United States' leadership in the global digital asset market. Traditional financial giants may enter the DeFi field through mergers and acquisitions, and any related signs will trigger a revaluation of the leading DeFi projects.
Summarize
Although the altcoin market faces many challenges, the continuous improvement of infrastructure and the mature development of DeFi projects still provide soil for future market innovation and investment. In this context, paying attention to DeFi projects with good business development, wide moats and attractive valuations may be an effective strategy for investors to cope with the current market environment.
